What are Living Trusts?
Living Trusts, also called Inter Vivos Trusts, are an estate planning tool (a legal document) that is created while one is alive. They are also sometimes called Family Trusts, as assets are held / managed for the benefit of family members. Living Trusts allow one’s assets to be distributed upon their death to named beneficiaries without going through probate: a legal process through which a deceased’s assets are distributed and debts are paid. The process of probate can be expensive and lengthy (months to several years), and probate records are available for the public to see, leading to many people wanting to bypass it.
Most commonly, Living Trusts are revocable, and therefore, Living Trusts are sometimes called Revocable Trusts or Revocable Living Trusts (RLTs). This can be quite confusing, as all revocable trusts are Living Trusts, but Living Trusts do not necessarily have to revocable (they can be irrevocable). When a person creates a Revocable Living Trust, they still maintain control over the trust assets as long as they are alive. In other words, they still own the assets and can change, or even terminate, the terms of the trust. For this reason, revocable trusts do not protect countable assets from Medicaid.
With an Irrevocable Living Trust, the person who created the trust cannot change the terms of the trust or terminate it. They no longer own the assets. While irrevocable trusts violate Medicaid’s Look-Back Period, they are sometimes used in Medicaid Planning as a Medicaid planning tool.
For the purposes of this article, we will assume Revocable Living Trusts and Living Trusts are synonymous. In other words, we will assume the Living Trust is revocable rather than irrevocable. Note: In contrast to a Living Trust, a Testamentary Trust is set up in one’s will and is established following their death.
How do Revocable Living Trusts Work?
To begin, there are generally four main parties involved in a Living Trust: 1) The grantor, also called a settlor, trustor, or creator – the person who owns the assets and creates the trust 2) The trustee – the person who manages and distributes trust assets via the terms set forth by the trust. With Revocable Living Trusts, the grantor can also serve as trustee. 3) A successor trustee is also often named, who will fill the trustee position upon the original trustee’s incapacitation or death. “Incapacitation” means one can no longer manage the trust due to physical or mental impairments. 4) Beneficiary/(ies), also called a grantee(s) – the person(s) who will inherit the assets after the grantor dies.
To set up a Revocable Living Trust, the grantor creates a legal document (a written agreement) that outlines the terms and conditions for managing and distributing their assets. The grantor, trustee, successor trustee and beneficiary/(ies) are named, as well as the assets (i.e., real estate, personal property, bank accounts) that are being transferred (signed over) into the trust. Since the trust is revocable, the grantor still has access to the trust assets, and therefore, is still considered the owner of the assets. After the grantor’s death, trust assets bypass probate and the trustee (or successor trustee) distributes trust assets to the beneficiaries as outlined in the Living Trust.
Can Living Trusts be Used in Medicaid Planning?
A Revocable Living Trust is not recommended for Medicaid planning, as it does not provide Medicaid protection from Medicaid’s asset limit. The value of the assets within the trust are counted towards Medicaid’s asset limit. This is because the person who created the trust (the grantor) still has control over their assets, and therefore, Medicaid considers the grantor to still own the assets.
Additionally, even one’s primary home, which is generally not counted towards Medicaid’s asset limit, given home exemption rules are met, may lose its exempt status if put into a Revocable Living Trust. This means one’s home equity value will count towards Medicaid’s asset limit, almost certainly pushing one over the asset limit. As an example, Arizona, Colorado, Oklahoma, Pennsylvania, and Texas are all states that count one’s home towards the asset limit if it is in a Revocable Trust.
Compare to Medicaid Asset Protection Trusts
While Revocable Living Trusts cannot protect one’s assets from Medicaid’s asset limit, a Medicaid Asset Protection Trust (MAPT) can. Furthermore, MAPTs can protect one’s assets from Medicaid’s Estate Recovery Program (MERP). Via MERP, a state’s Medicaid agency attempts reimbursement of long-term care costs for which Medicaid paid. This happens following the death of the Medicaid beneficiary, with the debt often being collected via the sale of one’s home.
Medicaid Asset Protection Trusts are a type of Irrevocable Living Trust. In other words, the trust is created while one is living, and the terms of the trust are irrevocable (cannot be changed or terminated). Since the person who created the trust (the grantor) no longer has access to the assets within the trust, the grantor is no longer considered to be the owner of the assets. However, the transfer of assets does violate Medicaid’s Look-Back Period. This is generally 60-months immediately preceding one’s long-term care Medicaid application, during which Medicaid checks for any assets that have been gifted or sold for under fair market value. Transferring assets into an irrevocable trust is considered a “gift”, since the individual no longer has access to the assets, nor is considered the owner of the assets.
Consult a Certified Medicaid Planner
When persons have assets over Medicaid’s limit, one must either “spend down” their assets in a Medicaid-compliant way, or implement Medicaid planning strategies to protect their assets for loved ones. Some of these strategies violate Medicaid’s Look-Back Period, and therefore, must be implemented well in the advance of the need for long-term care or with careful planning. Medicaid planners have a wealth of knowledge and experience in this area and can be extremely beneficial in this area. Find a Certified Medicaid Planner.